The Debate Over a Tax Break Designed to Help Startups

Supporters argue QSBS is vital to founders and early‑stage growth, while critics question whether it has drifted toward benefiting venture capital.

BY MELISSA ANGELL, SENIOR STAFF WRITER @MELISSKAWRITES

Illustration: Inc; Photo: Getty Images

New York’s tech and venture capital community is pushing back against a state legislative proposal that would eliminate a capital gains tax break widely used by venture investors.

At issue is the qualified small business stock (QSBS) exclusion, which allows investors and founders to exclude up to 100 percent of capital gains on small business stock held for more than five years. The provision, which can shelter millions of dollars in gains, was expanded last year under the One Big Beautiful Bill Act.

State lawmakers are now seeking to retroactively end the exclusion in New York, arguing that QSBS does not meaningfully support small businesses. The benefit applies only to C corporations, a structure that bill sponsor Rep. Andrew Gounardes (D‑NY) says is used by fewer than five percent of U.S. businesses. Lawmakers also dispute claims that the exclusion drives startup investment, arguing that venture capital would flow to startups regardless of the tax incentive.

Gounardes pointed to venture firms such as Andreessen Horowitz as major beneficiaries, writing in the bill that it would be “absurd” to suggest firms of that scale would stop investing in technology companies without the QSBS incentive.

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The exclusion’s value depends on how it is calculated. While there is a $10 million or $15 million cap based on when stock was acquired, investors can also exclude gains equal to ten times their original investment. That structure allows, for example, an investor who put $2 million into a company to shield up to $20 million in gains if the company later exits successfully.

Lawmakers point to Treasury data showing that use of the QSBS exclusion has surged and that its benefits are concentrated among wealthy investors. A Treasury Department review of tax returns from 2012 to 2022 found that QSBS claims peaked in 2021, when taxpayers excluded $40 billion in gains. The report also found that claims were heavily skewed toward high earners: taxpayers excluding more than $1 million in gains accounted for roughly 90 percent of QSBS use over the decade.

Despite those findings, business groups are mobilizing to preserve the provision. Tech:NYC, a local nonprofit, gathered more than 1,000 signatures opposing the bill, warning that the change would make New York less attractive to founders and investors.

Steve Fulop, who leads the Partnership for New York City, said the proposal signals a broader threat to the city’s competitiveness. While New York benefits from a deep talent pool, he argued that a less favorable tax environment—combined with high costs of living—could push entrepreneurs to build companies elsewhere.

“The business community in New York feels like it’s under attack as a whole,” said Fulop.

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